403(b) vs. 457(b) Differences

[WanderALot]

Hello,

My wife is a school teacher at a district which allows her to contribute $14k to a 403(b) and a 457(b). We have been contributing to the 403(b) but we're considering also contributing to the 457(b).

I've looked all over the web and there's tons of conflicting info on this (especially since these plans were changed after the tax cut of 2001). Can anyone shed some light on this:

1. The major difference seems to be that we can withdraw from 457(b) at any age without penalty (no 10%) penalty which is good thing. Does this mean that the 72(t) rule doesn't apply? Or is that completely different?

2. I've remember hearing some time ago that the ownership/bankruptcy protection is different between the 403(b)/457.

3. As I understand it, both 403(b) and 457 allow rollovers since 2001. Additionally, it SOUNDS like we can rollover the 457 plan into an IRA even before employment terminates??

4. With this in mind, what the ER implications of adding the 457 (I guess this is related to question 1)
to our retirement portfolio? Any gotchas to needing to use the money before age 59 1/2??

I tried to read the IRS publication 403 and 457 and am hopelessly confused!

Thanks!

 

[BigMoneyJim]

1: 72(t) applies only to IRAs. To use 72(t) you roll your qualified plan into an IRA first. 457 withdrawls are out of my realm.

2: For someone else, although I'd like to know what bankruptcy protection for IRAs and 401(k)s is while they're at it.

3: WRT 401(k)s, 403(b)s and 457s I got the impression from the IRS you could rollover while employed but got the impression from my employer/trustee that I couldn't. I haven't investigated further, but I've seen where employers/trustees avoid volunteering information which may encourage you to take your money out of their plan without buying an annuity. (I wonder why... : ) So further investigation is warranted I think.

4: Generally speaking, tax-deferred retirement savings is far more powerful than after-tax savings. I don't know the 457 rules, but I'm fairly sure 457s and 403(b)s are "qualified plans" and can be rolled into an IRA for 72(t) if there isn't a better pre-59.5 withdrawal method in the original plan.

Disclaimer: I'm certainly not an expert at this stuff, and individual situations may vary. I'm comfortable enough with my knowledge and situation that I plan to use my 401(k) as my primary retirement vehiclle and roll it into my IRA whenever changing jobs with the intention of using 72(t) when the time comes.

 

[WanderALot]

Thanks for your reply.

1: 72(t) applies only to IRAs. To use 72(t) you roll your qualified plan into an IRA first. 457 withdrawls are out of my realm.

I should have asked that question better. From my understanding, there is no 10% penalty for withdrawing from the 457 before 59 1/2, so therefore, I would conclude that I should be able to withdraw money at any age (paying only the income tax). This would mean that I don't need to roll it over to the IRA and then use 72(t) to get the money out.

This sounds especially good to me since my wife wants to teach for quite a bit longer than I want to be at my job.

There seems to be an incredible amount of confusion WRT to 403(b)s and 457s. I'm hoping that eventually 401/403/457 will all be folded into a single retirement vehicle as has been suggested in the past. Not holding my breath though.

 

[Bob_Smith]

WanderAlot,

I believe you are correct. The 10% penalty should not apply. See question 5, bullet 2 on this web page.

http://www2.icmarc.org/xp/vl/457info/457portabilityqa.xml